Saturday, May 3, 2014

Leading market monetarist re-discovers paradox of thrift.

David Beckworth, leading market monetarist, claimsthat the more money people save, the lower is aggregate demand, all else equal. Or put another way, the higher the demand for money, the lower will aggregate demand be, all else equal.

Now that’s just Keynes’s so called “paradox of thrift”. (The paradox of course is that saving is allegedly virtuous, but saving money can have an undesirable effect: raising unemployment.)

But market monetarists don’t care for Keynes: at least another leading market monetarist, Scott Sumner, is regularly dismissive of Keynsianism.

And Scott Sumner also hates Modern Monetary Theory. But Warren Mosler is a leading MMTer and Mosler’s law states that “There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.” (See sentence in yellow at the top of Warren’s site.)

I.e. Warren is saying that given a recession, we should just create central bank money and spend it (and/or cut taxes). And that has two effects: the fact of spending more will increase numbers employed. And second, the increased money supply ameliorates what Beckworth calls “excess money demand”.

So do we now take it that market monetarists have been converted to Keynsianism and MMT?